Trump's Trade Tussle With China Is Indicative of a Future Free Market Failure

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President Donald Trump’s latest twist in the ongoing trade war with China reveals the core philosophy of his thinking. It is about bilateral barters. And only titans having economies suitable to barter trade count in this game. Multilateralism is out. So is the basic idea of trading via money buying from one country and selling to another.

The U.S.-China agreement entered into mid-January 2020 sets targets for China importing more (about $50 billion) from the United States in four categories: manufactured goods, agriculture, energy and services. Allegedly, an annex, which is not published, specifies a list of subcategories that China is going to buy.

This is contradictory to market economics. In a market economy framework, China would already have bought these goods and services from America. The reason it has to be done by a kind of command economy is because it was not competitive. This has three effects. First, suppliers to China are switched from more competitive economies to less competitive ones. Second, the United States will channel production factors into sectors that cannot compete on their own. Third, countries will be squeezed out of a market where they have won the right to be by being more competitive than American producers.

This is what economists call “trade diversion,” which entails a loss of welfare. Furthermore, the United States, as a high priest of free markets, is now adopting a command economy reminiscent of the Soviet-style, which most of us thought was outmaneuvered more than thirty years ago.

The China trade war is not an isolated case. Trump uses the same tactic towards the Europeans with the Nordstream 2 gas pipeline beneath the Baltic Sea trying to force them to buy American gas instead of gas from Russia.

Geopolitically, many of the countries crowded out used to be good American allies. Now, they are being sacrificed by the United States, which is violating the very principles it upheld and preached to the rest of the world for many decades.

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